Question

Orange Ltd. is considering purchasing a new manufacturing plant that costs $500,000. The manufacturing plant will generate revenues of $150,000 per year for ten years. The operating costs needed to generate these revenues will total $75,000 per year. The manufacturing plant will be depreciated on a straight-line basis over ten years to zero. Orange Ltd.’s tax rate is 30 percent, and its cost of capital is 10 percent.

**(a)** What is the net present value of this
project?

**(b)** Should the company approve this project?
Explain why or why not. (Show all of your calculation).

Answer #1

Steamboat Springs Furniture, Inc., is considering purchasing a
new finishing lathe that costs $64,262.00. The lathe will generate
revenues of $96,152.00 per year for five years. The cost of
materials and labor needed to generate these revenues will total
$48,052.00 per year, and other cash expenses will be $10,462.00 per
year. The machine is expected to sell for $9,573.00 at the end of
its five-year life and will be depreciated on a straight-line basis
over five years to zero. Steamboat...

Steamboat Springs Furniture, Inc., is considering purchasing a
new finishing lathe that costs $58,421.00. The lathe will generate
revenues of $98,740.00 per year for five years. The cost of
materials and labor needed to generate these revenues will total
$50,013.00 per year, and other cash expenses will be $10,432.00 per
year. The machine is expected to sell for $8,674.00 at the end of
its five-year life and will be depreciated on a straight-line basis
over five years to zero. Steamboat...

Steamboat Springs Furniture, Inc., is considering purchasing a
new finishing lathe that costs $64,262.00. The lathe will generate
revenues of $96,152.00 per year for five years. The cost of
materials and labor needed to generate these revenues will total
$48,052.00 per year, and other cash expenses will be $10,462.00 per
year. The machine is expected to sell for $9,573.00 at the end of
its five-year life and will be depreciated on a straight-line basis
over five years to zero. Steamboat...

Steamboat Springs Furniture, Inc., is considering purchasing a
new finishing lathe that costs $61,793.00. The lathe will generate
revenues of $99,910.00 per year for five years. The cost of
materials and labor needed to generate these revenues will total
$48,957.00 per year, and other cash expenses will be $10,944.00 per
year. The machine is expected to sell for $8,130.00 at the end of
its five-year life and will be depreciated on a straight-line basis
over five years to zero. Steamboat...

Steamboat Springs Furniture, Inc., is considering purchasing a
new finishing lathe that costs $61,475.00. The lathe will generate
revenues of $99,653.00 per year for five years. The cost of
materials and labor needed to generate these revenues will total
$50,876.00 per year, and other cash expenses will be $11,734.00 per
year. The machine is expected to sell for $8,467.00 at the end of
its five-year life and will be depreciated on a straight-line basis
over five years to zero. Steamboat...

Crane Lumber, Inc., is considering purchasing a new wood saw
that costs $70,000. The saw will generate revenues of $100,000 per
year for five years. The cost of materials and labor needed to
generate these revenues will total $60,000 per year, and other cash
expenses will be $10,000 per year. The machine is expected to sell
for $2,100 at the end of its five-year life and will be depreciated
on a straight-line basis over five years to zero. Crane’s tax...

Crane Lumber, Inc., is considering purchasing a new wood saw
that costs $45,000. The saw will generate revenues of $100,000 per
year for five years. The cost of materials and labor needed to
generate these revenues will total $60,000 per year, and other cash
expenses will be $10,000 per year. The machine is expected to sell
for $1,400 at the end of its five-year life and will be depreciated
on a straight-line basis over five years to zero. Crane’s tax...

Rocky Mountain Lumber, Inc., is considering purchasing a new
wood saw that costs $65,000. The saw will generate revenues of
$100,000 per year for five years. The cost of materials and labor
needed to generate these revenues will total $60,000 per year, and
other cash expenses will be $10,000 per year. The machine is
expected to sell for $3,500 at the end of its five-year life and
will be depreciated on a straight-line basis over five years to
zero. Rocky...

Rocky Mountain Lumber, Inc., is considering purchasing a new
wood saw that costs $65,000. The saw will generate revenues of
$100,000 per year for five years. The cost of materials and labor
needed to generate these revenues will total $60,000 per year, and
other cash expenses will be $10,000 per year. The machine is
expected to sell for $4,000 at the end of its five-year life and
will be depreciated on a straight-line basis over five years to
zero. Rocky...

Strozzi Company is considering a new
equipment for their factory in Torin. The equipment costs $500,000
today and it will be depreciated on a straight-line basis over five
years. In addition, the company’s inventory will increase by
$73,000 and accounts payable will rise by $42,000. All other
operating working capital components will stay the same. The change
in net working capital will be recovered at the end of third year
at which time the company sells the equipment at an...

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